Politics overshadow Canadian energy performance

Jeffrey Jones

8 Min Read

CALGARY, Alberta (Reuters) - Pipeline politics overshadowed performance in the Canadian energy industry through the first three months of this year, as prices for the country’s heavy crude oil slumped, pointing to a string of corporate results that will be mediocre at best.

As companies roll out first-quarter numbers in the coming weeks, however, sentiment among producers over the commodity prices has turned more bullish, with both bitumen and natural gas climbing to several-month highs.

However, the recent rise from the doldrums is not reflected in shares of Canada’s largest oil and gas producers as political concerns resulting from uncertainty over Washington’s approval of the Keystone XL pipeline proposal to Texas refineries has offset the price fundamentals, making investors wary.

“There’s a disconnect between Canadian pricing and these companies’ (share prices),” said Martin Pelletier, managing director and portfolio manager at TriVest Wealth Counsel.

Some of the energy names that had been in demand for their quality assets and strong prospects are currently out of favor, Pelletier said, using MEG Energy Corp (MEG.TO), the oil sands producer, as an example. MEG sank 10.5 percent to C$28.29 in a broad resources sell-off on Monday.

The contentious $5.3 billion Keystone XL project is seen as a linchpin to higher long-term returns for the industry, now facing pipeline bottlenecks. The proposal is being met by staunch opposition from environmental groups.

“The oil and gas sector has been languishing in recent quarters and, from a global context, Canada has been amongst the most out of favor due to the perception of higher cost and higher risk (mainly due to concerns over Keystone XL approval),” CIBC World markets said in recent report.

The Toronto Stock Exchange’s oil and gas group has fallen nearly 5 percent since the start of the year, compared with a 2.8 percent decline in the broad TSX composite index. On Monday, the energy group skidded 4 percent.

Besides the pipeline controversy, earnings from energy companies are expected to be the worst among the 10 TSX sectors for the first quarter, according to Thomson Reuters Starmine Smart Estimates. Profit for the energy companies is expected to shrink by 6.1 percent on average versus a year ago. At the other end of the spectrum, the health care sector is expected to log the biggest gain, at 15.5 percent.

Results, starting with Encana Corp (ECA.TO) on April 23, are not expected to shift investor sentiment. Instead, many investors are waiting for greater clarity on Keystone XL, CIBC said. The Obama administration is expected to make a decision on the project this summer.

The heavy oil glut, which Alberta Premier Alison Redford termed the “bitumen bubble”, loomed large during the quarter.

Surprisingly, however, prices have since retraced ground surging to levels not seen in more than six months. Analysts and investors cite the slower-than-expected start-up of Imperial Oil Ltd’s (IMO.TO) C$12.9 billion ($12.6 billion) Kearl oil sands project in northern Alberta as one of the major reasons.

Western Canada Select heavy crude sold for about $40 a barrel under U.S. benchmark light oil at times in January, but recent discounts have shrunk to as little as $12 a barrel under.

In the first quarter, WCS sold for an average $67.19 a barrel, 12 percent less than the year before. WTI was 8 percent cheaper at $94.35 a barrel.

Now, some oil producers have become more bullish on the prospect for higher prices, and it could mean spending on operations will be at least maintained and perhaps bolstered, said Martin King, a commodity price forecaster with FirstEnergy Capital Corp.

“It really caught everybody by surprise, just in terms of how quickly it reversed itself,” King said.

Longer-term fundamentals, such as stiff competition from burgeoning volumes of cheaper-to-produce U.S. domestic oil, have forced some oil sands producers to shift strategy.

Last month, Suncor Energy Inc (SU.TO) scrapped plans for its multibillion-dollar Voyageur upgrading plant, saying returns would not meet previous expectations. It said it would direct the capital spending to other parts of its business.

It bolstered its cash position even more on Monday, announcing a C$1 billion sale of Western Canadian natural gas properties, a move that may lead to a dividend rise or share buybacks.

“I think that would be a positive catalyst for the stock,” said John Stephenson, vice-president and portfolio manager at First Asset Investment Management in Toronto.

Suncor is expected to report earnings of 71 Canadian cents a share, down from year-earlier 85 Canadian cents a share, according to Thomson Reuters I/B/E/S.

Stephenson said the Canadian energy stocks have suffered with the loss of many investors from the United States who have had better returns among U.S. energy companies.

NATURAL GAS PRICE SURGE

Natural gas prices, depressed in recent years due to a boom in production fueled by the spread of hydraulic rock fracturing technology, are also surpassing many forecasts. U.S. gas was selling recently for more than $4.10 per million British thermal units, compared with a 2012 average of just over $2.80.

NYMEX gas averaged $3.47 per mmBtu in the first quarter, up a hefty 39 percent from the same period in 2012.

Still, earnings at Canada’s largest gas producer, Encana, are expected to fall to 6 cents a share for the quarter, down year-earlier from 33 cents a share, partly due to the gradual increase of liquids-rich gas and oil output, which will not offset declining dry gas output, CIBC said.

Investors will be focused on word of a permanent replacement as chief executive following the abrupt retirement in January of Randy Eresman, and any new strategic direction the company could take under new leadership.

Just three of the Top 10 energy companies by market capitalization are expected to report increases in profit.

Among them is oil sands producer and refiner Cenovus Energy Inc (CVE.TO), which has taken a series of steps to help boost its returns from bitumen output, including hedging and shipping oil by rail. Its U.S. refining operations also have had strong margins.

The average estimate among analysts is for earnings of 48 Canadian cents a share, up from 45 Canadian cents the year before.

The other expected gainers are Canadian Natural Resources Ltd (CNQ.TO) and Crescent Point Energy (CPG.TO).